How to lose a lot of money.
Being strongly criticised in the media and a lower share price are often the consequences of holding too much or too little inventory.
One of those occasions occurred this week, when a major retail chain reported a poor financial result. Commentators hinted that a monster $100m sale will be held soon – not to boost the company’s sales but to reduce inventory, which costs about two percent per month to hold.
It was also reported that a substantial amount of inventory had suffered ‘shrinkage’. This is retail language for product being past its ‘use by’ date or stolen – either way, the value of the non-existent inventory must be written down.
An announcement like this will likely cause a career decision by the CEO and those responsible for supply chains, but it can also have an impact on competitors. While this type of event may not be important in large countries with multiple regional markets, in countries with smaller populations the effect on supply chains can be substantial.
For the retailer in question, it may have to quickly replenish the inventory written down as ‘shrinkage’. By holding a surplus stock sale, competitors will be compelled to respond or lose market share. The response will be that large retailers must reduce the sale price (and therefore margins) of their stock and buy-in additional or replacement inventory on short lead times. These actions has a flow-on effect in the supply chains of major retailers.
Costs are through the supply chains
The concentration of manufacturing capacity in China has it focused on the large markets of North America and western Europe. Rush orders from retailers in small countries can be a nuisance as they interrupt current long production runs. The alternative is to buy from other low cost countries, but either way it is likely to result in higher financing and handling costs in exchange for the shorter lead times. Likewise, obtaining shipping space on short notice can be a challenge.
If processes at the retailers are changed to accommodate newly rushed plans, then errors occur that cost more to correct. Additional demands on contracted logistics service providers can mean more cost, especially if using air and express overnight freight.
This event illustrates that management of inventory in retail is critical and a large mistake at one retailer can have roll-over effects on all competitors such that overall costs rise and margins are reduced.
Employing capable managers throughout a company’s supply chains is not expensive, especially when matched against a $100m excess inventory sale.